Jack Plotkin, Formerly of Goldman Sachs, on the Market vs. the Economy
Wall Street vs Main Street – many have written about the differences in the movements of the stock market against what we like to call the “real” economy. At this point, according to Jack Plotkin, it feels like the two are completely disconnected. In these times, forever marked as the COVID-19, while the lives we have led just months ago seem like a distant memory and unemployment is at its highest it has been in nearly a century, the stock market has become untethered from gravity. As of this writing, the S&P is near record highs.
According to Jack Plotkin, a financial expert with over a decade at Goldman Sachs, understanding this discrepancy between the economy and the stock market relies heavily on comprehending the nature of the market and its forces. First, when one buys a company’s shares on the market, what is actually traded are the expectations of its future profits rather than just its current sales and earnings. For long-term investors, the decision to purchase shares relies on the prognostication of the company’s performance over a multi-year time horizon. In that context, and with that timeline, two or three subpar quarters due to external economic forces do not necessarily represent a red flag. Second, there is an aspect of psychology that plays a pivotal role. Most crises follow predictable cycles, with an overreaction followed by a rebound – even when that rebound flies in the face of historical economic wisdom.
Jack Plotkin, formerly of Goldman Sachs, highlights that another part of the reason the markets are experiencing this inexplicable froth is the Fed’s actions. Its first response to the crisis was to cut interest rates to zero, which pushed fixed income yields to record lows. At the same time, the federal government flooded the market with cash in the form of direct payments and forgivable payment protection plan (PPP) loans. With no upside in the bond markets and cash on hand, investors are left with little choice but to try their luck in equities.
Jack Plotkin also points out that in his time with Goldman Sachs he learned that the increasing social inequality has contributed to a situation in which the majority of Americans are worried about paying their bills while the socioeconomically advantaged class that has amassed considerable wealth during the bull market over the past decade continues to drive up the prices in the stock market.
Jack Plotkin further states that the Fed’s large-scale repurchases of corporate bonds and commercial paper in both primary and secondary markets has served as a pump to keep the monetary system working at artificially inflated levels, with more money flowing through the financial system to businesses, households, and government institutions than would otherwise have been the case in crisis conditions. This is something he came across at Goldman Sachs and the problem with this approach is that it may prevent a flashpoint meltdown but result in a much more protracted and attenuated economic downturn over time.
Jack Plotkin highlights that another reason for the divorce between the stock market and the economy is that the hardest hit industries are underrepresented in the major stock market indices. These include restaurants, hotels, resorts, cruise lines, and airlines that together comprise just above 2% of the S&P 500 market capitalization. On the other hand, the technology sector, which has remained stalwart in the face of the pandemic, makes up over 23% of the index.
Jack Plotkin’s final point is that the stock market’s current behavior has all the markings of a bubble, something he is keenly aware of from his time with Goldman Sachs. With consumer and mortgage debt near all-time highs, massive unemployment, and no solution to the on-going economic challenges posed by the pandemic, he expects a downturn to begin at some point over the next six months and potentially exacerbate over the winter season in the face of rising defaults and a potential third wave of the pandemic.